Ladies and gentlemen, thank you for standing by. Welcome to Fortrea Fourth Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker’s presentation there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would like now to turn the conference over to your speaker today, Hima Inguva, Head of Investor Relations and Corporate Development. Please go ahead.

Good morning, and thank you for joining Fortrea's fourth quarter 2023 earnings conference call. I am Hima Inguva, Head of Investor Relations and Corporate Development at Fortrea. On the call with me today are our CEO, Tom Pike, and our CFO, Jill McConnell. The call is being webcasted, and the slides accompanying today's presentation have been posted to our Investor Relations page of our website, fortrea.com. During this call, we'll make certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to significant risks and uncertainties that could cause actual results to differ materially from our current expectations. We strongly encourage you to review the reports we filed with the SEC regarding these results and uncertainties. In particular, those that are described in the cautionary statements concerning forward-looking statements and risk factors in our press release and presentation that we posted on the website. Please note that any forward-looking statements represent our views as of today, March 11, 2024, and that we assume no obligation to update the forward-looking statements even if estimates change. During this call, we'll also be referring to certain non-GAAP financial measures. These non-GAAP measures are not superior to or replacement for comparable GAAP measures, but we believe these measures help investors gain a more complete understanding of results. A reconciliation of such non-GAAP financial measures to the most directly comparable GAAP measures is available in the earnings press release and earnings call presentation slides provided in connection with today's call. With that, I'd like to turn it over to our CEO, Tom Pike. Tom?

Thank you, Hima. Good morning, everyone. Thank you for joining today's fourth quarter earnings call. Let me begin with a few comments on our progress in 2023, as well as talk about a couple of current events. I feel great about the progress we're making toward -- making Fortrea attractive to all of its stakeholders. This time last year, we were a division of a division within a much larger parent and ended 2023 as a standalone company, demonstrating the ability to sell work at a level that we believe will achieve market growth rates, at the same time as delivering on our commitments and improving our operations. We completed the spin from our parent company just before midnight on July 1. This team completed the spin at an impressive speed, separating out a $3 billion enterprise, while preparing it to go public in less than a year. As part of that process, we assembled a great leadership team, combining experienced leaders from the former parent and bringing in seasoned industry executives. At the same time, we recruited an outstanding board of directors. During the spin process, our team established a roadmap for independent operations in a way that protected our customers' data and assured ongoing projects. I'm proud to say that we did not lose any customers and no customer projects were disrupted, because of spin-related activities. We created and launched a new brand Fortrea, and morphed our whole company from blue to green in a matter of just a few months. Since our debut as an independent company on July 1, the pace of our transformation has not slowed. This organization works hard and it makes decisions at a fast pace. It's a testament to our team around the world that we continue to hit critical milestones. Our…

Thank you, Tom, and thank you to everyone for joining us today. We are pleased that for fiscal year 2023, we achieved or slightly exceeded the milestones we shared with you at the time of our spin. Delivering the midpoint of our revenue guidance range, achieving two quarters in a row with a reported book-to-bill greater than 1.2 times revenue, and exiting roughly 40% of our TSAs with our former parent. These achievements were driven by deliberate changes we introduced, for example, incentivizing our sales organization more effectively, fostering a customer mentality across the entire enterprise, and tightly managing our infrastructure activity and cost space. Turning to our full-year 2023 results, our backlog grew 3.6% sequentially, ending the quarter at $7.4 billion under the revised backlog methodology that we announced with our second quarter results. The continued spin year headwinds of lower full service clinical sales, elevated infrastructure costs, and the transition services agreement weighed on our fourth quarter results. We are working to mitigate these headwinds, and we expect to be on track with the previously shared margin improvement target of exiting 2024 and entering 2025 at a run rate around a 13% adjusted EBITDA margin. Revenues were $775.4 million in the fourth quarter, representing a 1.8% increase versus the same period last year. Clinical services revenues of $709.7 million grew 1.7% year-on-year driven by higher pass-through revenues, partially offset by lower service fee revenues. The lower service fee revenues were due to the reduced quantity of new business wins during the spin year that ran from July 2022 through June 2023, along with a mixed shift of some studies moving to longer duration. Enabling services revenues of $65.7 million increased 2.8%, driven by solid growth in our endpoint platform and higher pass-through revenue, partially offset by lower call…

Thank you, Jill. I'm beyond proud of this team and how far we've come in six short months as an independent company. We are now refocusing our company as a pure-play CRO. We're winning more business. We're running the business better. We're getting past the headwinds of the spin year. Growth, delivery and profitability are the priorities. Fortrea has a great position as a CRO in the industry. We have the solid medical, geographic and operational root systems from Covance, our predecessor CRO that has been an industry leader for over 30-years. Our size and scale are a good fit for customers large and small. We serve a tremendous number of biotechs and want to serve more in the future. We understand that biotechs are looking for support with assets that have potential, but might be overlooked by big pharma and thus need special care. Time frames and alignment with funding is critical. We have the expertise, high touch and agility, but also manageable scale to meet their unique needs. Jill described a few financial elements of 2024 moving into 2025. We expect 2024 to be another year of hard but fulfilling work, continuing our commercial transformation, innovating with our customers and largely exiting our former parent's infrastructure. Our business trajectory is up. Financially, it will be a tale of two halves. We believe this year we'll unleash opportunities that in 2025, will both better serve customers and demonstrate we can run this company with better margins and continuing to improve them from there. We have an extraordinary team of people at Fortrea at all levels, who are powering us forward, driven by our patient and customer inspired purpose and the growth opportunity ahead. We want to have the best culture in the industry. Guided by the engagement survey feedback from our employees around the world, we sometimes call for Fortreans, we're prioritizing what is most meaningful. Our people told us that a distinctive vision, strategy and values are critical, and that's where we've been focusing. I'm pleased to report that our engagement index is above the industry benchmarks and our attrition is lower than pre-pandemic. It's been a heavy lift so far, but we're up for continuing to transform this business for the better, confidence and commitment creates success, and our team is confident and committed. Fortrea is an exciting place to be. Now operator, let's open up for questions, please.

Thank you. [Operator Instructions] Our first question comes from David Windley with Jefferies. Your line is open.

Hi. Good morning. Thanks for taking my question. So I want to start with maybe the simpler one on the divestitures, want to make sure I understood $250 million in revenue and $30 million in EBITDA for the divested businesses. I presume that's an annualized number for 2024. And if that is, if I did hear that correctly, that's a higher margin for that business than I guess I would have expected given how it had been performing and so I wanted to understand -- I mean, you commented on kind of the focus and so forth. But I wanted to understand the decision to divest higher performing, higher profitability businesses than the core.

Yes, Dave, thanks for the question. I think I'd start by saying that when we looked at the business, we really believe being a pure-play CRO is the right focus for our management team. And so what we want to do is maximize the value for our customers and for our investors, frankly. And so we want to focus in that absolutely attractive segment. These businesses, while interesting businesses, and I like them, are not really core to that mission. And so we decided the best thing for Fortrea was to divest them. It does give us more flexibility in our capital structure, as well as more focus on management team. In terms of your question, yes, for modeling purposes, we'd give you those numbers $250 million and $30 million. The thing that I would remember, Dave is, that, that does not indicate those kind of -- the numbers that we're giving you for modeling purposes do not necessarily correlate directly to the EBITDA contribution of those businesses, because there are other factors associated with EBITDA. But for modeling purposes, we think that, that's fair as we move forward.

Okay. And then broadening out on the core, call it RemainCo your book-to-bill in the fourth quarter was above your target, perhaps maybe above market expectations as well. You had highlighted the Acelyrin situation and the independent review that you had done and highlighted that it may have had some impact on the progression of your bookings around the end of the year or into early 1Q. And so maybe if you could add a little bit more detail to a couple of things. One, the concessions that you are giving and why you did that in light of the independent review outcome; and then two, what progress have you made or what -- how would you assess or describe to us the net effect of those -- of that situation on the progress in your commercial efforts more broadly for bookings to start 2024? Thanks.

Yes. Let me start with your second question first there, Dave. With regard to the bookings, I think as we announced at JPMorgan, there was probably a little softness in December in biotech pipeline, which may be associated with this. And then as we discussed, there were a couple of key opportunities that we lost attributed to that situation. As you described, we did bring in an expert who is independent and she determined that in terms of the two key issues that we, Fortrea really was not the cause of those. And so we're pleased with that result. In terms of the effect in this quarter, what we mentioned in my remarks is that we have a solid pipeline. And if we execute on it, we believe that we can continue to deliver those desired 1.2 book-to-bills. So it's been solid. We haven't seen specific incremental effects since we talked to in January. But we're cognizant. We were cognizant of the potential when you get those kinds of headlines. I will say we're pleased to resolve the matter. It wouldn't be appropriate for us to comment further. And I spent time with their CEO, and I'm excited about their company, and I wish them well.

Got it, thank you. Thanks for taking my questions.

Thank you, Dave.

[Operator Instructions] Our next question comes from Elizabeth Anderson with Evercore. Your line is open.

Hi, guys. Good morning. Thanks so much for the question. Tom, you described, obviously, the demand environment in terms of the book-to-bill and sort of the world demand environment. I think in your prior question, solid. Can you maybe talk to us a little bit about sort of what you're seeing in terms of the demand profile from sort of the biotech environment? Obviously, I heard your comments about December. Obviously, the funding environment since then has been quite a bit stronger. So how does that sort of translate as you move into the fourth quarter? And any sort of major differences between biotech and pharma would be very helpful. Thanks.

Yes. Thank you, Elizabeth. A couple of things. Since about second quarter last year, we've seen a solid pipeline for our business. And that's been -- because of that, we've been able to deliver these solid book-to-bills that you've seen. In terms of biotech, I think the word we would use is solid. We've seen the funding for and we see the 2024 funding looks attractive for biotech. We continue to see a solid flow from there. In terms of big pharma, we see a solid flow from there as well. We see a nice mix of business. So we see a mix of full service plus FSP. So I think the best term for us is that we're continuing to see that solid flow with the exception of that softness in biotech in December. So does that get close enough to your question, Elizabeth?

Yes. That's helpful. And maybe as a follow-up, maybe this is for Jill. How do we think about -- obviously, you've talked about the margin improvement across the course of the year. And I take your comments for sort of the back half weighting of that, how do we think about the split between sort of gross margins and improvements in leverage that you're getting there from the growth and the mix of business versus some of the SG&A efficiencies and improvements you're making off of that side?

Sure, Elizabeth. I think that when you think about the back half, you'll see it be weighted a little bit more to revenue growth because the TSA exits are happening later in the year. So there will be improvement in SG&A, but you'll see more of it coming from revenue because as I had commented, we're holding on to some resource in anticipation of that growth. So we wouldn't expect to have to add a lot of additional resource to support that growth, at least in the near-term. And then you will see some improvement in SG&A, but it's going to be much more weighted to the end of the year.

Got it. Thanks so much guys.

Sure.

Thank you.

[Operator Instructions] The next question comes from Max Smock with William Blair. Your line is now open.

Hey, good morning. Thanks for taking our questions. Just wanted to follow-up on the margin front a little bit here. So can you just help us understand the cadence, any more color there for 2024. I think you're expecting about 9.5% at the midpoint for the guide this year, but then exiting the year, I believe you said at about 13%. Can you just walk through the margin progression on a quarterly basis and then provide some more detail around the different drivers behind that really aggressive ramp into the end of the year here?

Yes. Sure, Max. So I'm not going to give you the exact amount by quarter. But I think in the commentary, when you think about the one-third in the first-half and two-thirds in the second-half and that one-third in the first-half is going to come much more from the second quarter than the first quarter. The first quarter is going to be pretty much the nature of the impact of the soft book-to-bill that we had in that spin year because I know as we talked to some of you, we've talked about the fact, one year of soft net new business doesn't turn around in two quarters of good book-to-bill. But we will expect to see that start to improve a little bit in second quarter and then predominantly more into the second half. I think when you get to the second-half, it will obviously continue to improve on an ascending trajectory, but not in such a pronounced way. We would see Q3 and Q4 to be a little more balanced, although not exactly.

Got it. That's helpful. And then maybe looking even further ahead here. If we think about you exiting the year at around 13%, and it sounds like Q3 and Q4, not entirely dissimilar kind of in that low-teens range. And the guide for this year in total calling for about 9.5%. I guess any sort of detail you can provide on what this implies for margins in 2025? I mean, is it fair to say we should get at least, I think, 300-plus basis points of margin expansion next year?

Yes. I think in my remarks, I was trying to say that if we're exiting the year at that trajectory of 13%, we would expect to hold that 13% and deliver that for the full-year of 2025. So you definitely would get at least the 300 basis points compared to where we were guiding for this year.

Sorry, Jill, just to be clear, holding that, would that be kind of like worst-case scenario? I guess I'm just trying to understand, because I think you've laid out a path beyond that 13%. So is it a...

Yes, we would expect it, obviously, to improve slightly as we go through the course of the year, because the TSA exits allow us to start to make some of the more significant changes around SG&A, but those things will come at a little bit of a ramp. But I think just appreciating how much that is in terms of the total dollar value in that 300-plus basis points, I think at this point, we're not going to commit to anything greater than that. But we hope there will be upside. But obviously, we'll be able to share more with you on that, I would say, later this year once we confirm that we're fully on our TSA exit trajectory because that's really key to unlocking the SG&A improvement.

Yes. Max, as you can imagine, naturally, we'll be working toward progression, but Jill wanted to give you something to model.

Yes, certainly appreciate that and thanks again for taking our questions.

Sure.

Thanks.

[Operator Instructions] The next question comes from Justin Bowers with DB. Your line is now open.

Hi, good morning everyone. Jill, just sticking with the margins here. Just really basic. Is there -- could you help us understand what the ratios are embedded in the mid-point of the guide for direct costs and SG&A? And then my understanding is that you have some -- there's some investments and some reallocation of costs there and when does that normalize? Is that -- it sounds like on the -- from the previous question, it's going to continue into 2025. But just trying to get a sense of what the base is and where things are going to shake out.

Yes. I think -- so in terms of investments, we've been making those -- we made them through the second-half. They're not huge from a dollar perspective. We've been very thoughtful about the investments, but there are things that we need to do from a competitiveness and to really address what our customers need from us and that will continue. But I don't think you're going to see, at least in the near-term any huge outsized investments that will probably continue to play along consistent trajectory, and those are all things that are really improving in that cost of sales space. Having said that, the cost of sales based on some of the comments I made earlier, you'll see more of the improvement there as that revenue grows, naturally without having to add a lot of resource at least for the remainder of this year, that should improve cost of sales. SG&A should improve based on what we're doing. But the challenge there, again, is the timing of the TSA assets. And because they're largely Q3 really Q4, you won't see a huge amount of the improvement there until right at the end or even into early 2025. So I think you'll see more improvement in the cost of sales, margin in the back half of this year before SG&A and then SG&A will pick up and really start to accelerate in 2025.

Okay. And then into 2025, then will you have your -- will you be sort of reporting the costs, the direct costs and the SG&A, will they be aligned the way that in line with sort of peers and industry?

Yes, that's a great question. Sorry, I could have added that. But yes, actually, you're going to see when we report our Q1 2024 results, we will be showing our cost of sales and our SG&A in a manner that we believe is consistent with our peers. And then hopefully, you'll be able to see that trajectory more clearly as those both improve over time.

Okay. Great. I will save the rest for follow-ups. Thank you.

Thank you.

[Operator Instructions] The next question comes from Patrick Donnelly with Citi. Your line is open.

Hey guys, thank you for taking the questions. Tom, maybe one for you just on the competitive landscape. Can you just talk a little bit about what you're seeing? Obviously, you had -- the uncertainty there in December that you touched on. But can you talk about just the competitive landscape, pricing environment as well? Obviously, in the press release, you talked about the concessions that seems specific to the accelerant piece. But just what you're seeing on the pricing side and just the competitive landscape would be helpful.

Yes. Thank you, Patrick. We are continuing to see good opportunities, as I mentioned in my remarks, a nice mixture of full service and FSP opportunities. And Fortrea is at the table, I have to say, we talked a little bit about how it's a new brand, and we worry at times that some people may know Covance and not know Fortrea or may not know that we're the size and scale and with the capabilities that we are, so we're working on that. But that being said, the larger pharmaceutical firms, a lot of the biotechs, they understand who we are and the capabilities we have. So we feel very good about that. We have some -- a key customer in the office tomorrow, so very exciting. I think we're competitive on all fronts now being at the table. The pricing with regard to the pricing specifically, for us, there isn't much change. There's not much to report up or down associated with it. So what we're seeing in the near-term is no particular pricing pressure from any one party that we're competing with in our deals, just the usual pressure you have in this industry, which we all carefully manage our cost structures and try to be as effective as we can pricing things, but nothing really unusual at this point, Patrick.

Okay. That's helpful. And then maybe just one following up on some of the earlier bookings questions. You guys are probably in a little bit of a unique situation here where we're well into March here and you're kind of talking about the 1Q environment. It sounds like, again, a little bit of that uncertainty that you talked about in January mostly pass. And again, I guess with three weeks or so left in the quarter, you sound pretty confident on kind of clearing for the 1Q, but I just want to make sure in terms of the booking environment to start the year, the trajectory is on track. And again, with 1Q coming close to the end here that you're confident on that bookings book-to-bill piece? Thanks so much.

Yes. Thanks. Whenever you're in the third quarter and you're talking about your business, you have to be cautious because we have to execute, but the pipeline is sufficient for us to continue to drive this 1.2 or better book-to-bill. So I can tell you that at this point. And again, we feel good about the opportunity set that we're seeing. We feel good about the value we're delivering for the customers and their reaction to it. So I think we feel good about that. But as you say, like always with the CRO, that last month of the quarter, you've got to execute, and you got to work hard. Otherwise, you don't make those numbers. And I think the industry is pretty good at that, and we are, too.

Great. Thanks, Tom.

Thank you.

[Operator Instructions] The next question comes from Derik De Bruin with Bank of America. Your line is open.

Hi, good morning and thank you for taking my question. Hey, I just wanted to clarify a couple of points. So your -- so we were sort of at the -- first of all, on the EBITDA margin for 2025. I mean 2024 guide excludes the divestiture. That your comments on the 2025 numbers also -- are you excluding divestiture or including the divestiture on that, right? Just sort of -- I just want to make sure we're doing the apples-to-apples on the comments.

Sure. We -- in that case, we're saying 13% margin. So it's -- we're seeing -- we'd be committed to getting to that margin irrespective of divestiture or not.

Okay. And -- so -- and then just also on that 13%, I might have misheard a prior question, so I just want to clarify this from a prior answer to it. The -- are you saying that -- what's the opportunity going beyond that 13%? I know you talked about the 300 basis points prior to this. Is that -- or is that already captured in that 13%? Or is there incremental upside beyond 2025?

Yes. It's a very fair question. I think it will depend again on the strength of the book-to-bill. The more that we get over 1.2 and convert that revenue, the more likely you are from a revenue growth perspective, be able to drive that. It's also going to depend on how quickly we exit those TSAs. If we do it again with our plan, it gives us a nice runway in '25 to do that, and we're looking at some additional transformational projects there to accelerate that. There's a lot of opportunity. It's just how quickly we can execute on it while still maintaining business operations and things. So we certainly hope there will be some upside. But at this point, we're just not able to commit to it because until we get further along in the year and are certain that the TSAs are exiting on the plan, and then we can make some of these other changes, and we continue to have these quarters of book-to-bill, we're just not quite ready yet. But again, as I think as we get later in the year, and those are more firm, then we'll have more confidence.

Yes, and longer term Derik, I think we still have the same targets. So nothing's changed that we believe there's a little bit of scale benefit to being very large like some of our competitors are associated with corporate costs and some other costs. But in general, we should be able to move the CRO right into the upper mid-teens.

Yes. Thanks, Tom. That's what I was looking to clarify on that one. Thank you. And I was a little bit surprised on the enabling services, just sort of the implied valuation of that. I mean, given that you've called out the uniqueness of the asset at your Analyst Day. I guess what was -- why wasn't -- I was just sort of curious as to why the multiples are sort of where they were given what that business is and given where the margin is of it. Can you just talk a little bit about the valuation process and how you looked at it?

And you're specifically asking in general about the price and that type of thing?

Yes. The price of the deal. It just looks a little low relative to what sort of like how the assets were described.

Yes. These are complex transactions. We did go through a full process. I think it was announced that Barclays helped us do it. We had a fair amount of interest in these assets and went through the normal down selection process and then deep due diligence and ultimately down selected to a couple and then down selected to one. I will tell you, I'm really pleased that its Arsenal. I think they have demonstrated a willingness to invest in businesses, grow businesses over time. So I'm really pleased and I've got to know that team better and we're pleased for those businesses. From our standpoint, when we did our strategic review, we just need to concentrate the investments we have on really becoming the CRO of choice. And I think Arsenal will be better situated to make the investments necessary to maximize those assets, Derik. And there's a timing aspect to all of this. So just given the nature of investing cycles, our available capital, what we would see there is that they may be able to make investments faster to be able to let those businesses do what they can do. On the other hand, there's a real positive for us and our investors. Some investors look at our capital structure and our debt-to-EBITDA multiples and things and would like to see us lower. And you may know that our covenants really require us to use about 60% of the proceeds for debt pay down. So we are going to get a little bit of room on our debt, which I think is positive for us. And we are looking at some other things as well. So I think you look across this transaction, we focus the business on this really attractive clinical business, Phase I to IV. We focused the management team because we've got a lot going on. So we focus the management team on being able to drive business and raise margins. We let those businesses be all they can be because they get the investment and attention that they probably deserve in the shorter term. And then we address some organizations to a potential investor concerns about our capital structure. So you look across those four and to me, Derik, I think we've really got to win here.

Well, my next question was going to be on the leverage implications, but you answered that. So thank you very much. Appreciate it.

All right. Thank you.

I show no further questions at this time. I would like to turn the call back to Tom Pike for closing remarks.

Well, thanks, everybody, for joining today. We continue to work hard here at Fortrea for our customers and for our investors. And I think the team is doing a great job. So we appreciate your continued support in our journey. Thanks.

This concludes today's conference call. Thank you for your participation. You may now disconnect.